Non-Heir at the Helm

June 29, 2012 07:36 PM

An aspiring farmer can help create a legacy without the family ties

Dave and Deb Welsch are only in their mid-50s, but the Milford, Neb., couple already have a succession plan in place for their diversified grain and livestock operation, West Blue Farm. Even more unusual, they plan to build a future for their 98-year-old operation with a non-heir at the helm.

Their decision is one David Baker wishes other farmers would consider. "I have 550 young people who would love an opportunity, and only 20 older farmers willing," says Baker, a farm transition specialist with the Beginning Farmer Center at Iowa State University.

A variety of pros and cons come with transitioning the farm to a nonfamily member. But Kevin Spafford, Farm Journal succession planning expert, says the decision can be a winning option for all involved.

"The retiring farmer receives a fair return for a lifetime of work. For the aspiring farmer, it’s a foot in the door, an opportunity that may be impossible without the assistance of a retiring farmer," he explains.

There are potential downsides to working with a third party, though, says Neil Harl, Iowa State University emeritus economist.

"They lack the close family ties, so when the going gets difficult they are usually more inclined to bolt the operation, especially if other employment alternatives are available," he says.

Keep an open mind. Dave and Deb work with Steve and Shelley Lorenz, who are only a decade younger. "We thought we were looking for someone in their early 20s or 30s," Dave recalls. "I was 49 and Steve was 37 when they moved here from Minnesota. While we weren’t what each other was expecting, it’s worked out well." The average age of the aspiring farmers Baker works with is 37.

When on the lookout for a successor, develop a list of the four or five most important skills and traits you want and need in an incoming owner, advises Angela Gloy, Purdue University agricultural economist.

On a national average, beginning farmer loan obligations increased by 4% for 2011 compared with 2010, as the U.S. promotes rural revitalization.

For the Welsch family, personal character was at the top of the list: "A lot of our highest priorities were nonfarm and nonfinancial related," Dave says. "We’re very family oriented, churchgoing and community minded. We wanted a couple with those same priorities, too."

Having common goals was also important. "We’d been certified organic since 1993, and we wanted someone who would be committed to what we’d developed during the past 20 years," Dave says.

Transition options. Your business plan should reflect the transition and current owner’s exit strategy. The Lorenzes joined the Welsches as employees with a 10-year transition plan. That timetable accelerated, however, based on a successful partnership and the addition of twin girls to the Lorenz family, which also includes two sons.

"In 2011, Steve and Shelley took over the crop side of the farm, and we retained the beef side. I actually work for Steve now," Dave says. "I do a bit of field work, all the financial records and organic record keeping."

There is a difference between bringing an unrelated person in as a tenant and as a co-partner or corporate shareholder-employee, says Iowa State’s Harl. If the individual is brought into the farming entity (as opposed to a leasing arrangement) starting out, the retiring farmer typically provides the aspiring farmer with a salary and bonus.

"After evaluation, I usually recommend paying cash to cover living expenditures and equity in the business [which does not diminish cash flow] to bring the compensation package into the range appropriate for the person’s abilities," Harl says.

Make Winners of Beginners

When the farm crisis of the mid-1980s wiped out a lot of young farmers, Iowa attorney John Baker asked a simple question: Why did it happen? Thirty years later, the legacy of that question has helped Baker prevent history from repeating itself for many people.

Farming is not the only multigenerational occupation, so Baker looked at nonagriculture multigenerational businesses and saw that they used a succession ladder. The younger generation slowly work their way up the ladder until the owner eventually retires and the younger generation is ready to take over the business.

"That wasn’t the way we were putting people into farming," he says. "We were trying to have them borrow as much money as they could to buy land. That’s not a good business model."

A place to connect. In 1990, Baker developed Farm On, a program that matches retiring farmers without an heir to beginning farmers who do not own land. By 1994, he had laid the groundwork for the Beginning Farmer Center, which still facilitates Farm On. Since then, the Beginning Farmer Center has collected more than 17,000 surveys about succession, revealing that succession issues are somewhat timeless.

"A lot of the challenges we saw in the 1980s still exist today," he says. "It’s never really a good time to buy into a farm. People always think it was better last year or will be better next year."

Successful succession planning requires two basic elements. First, family discussions need to run much deeper than who will eventually inherit the land. Second, the older generation truly has to be willing to retire.

"That doesn’t mean sitting on your porch waiting to die," Baker jokes. "It’s a business, so treat it as a business."